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Friday, May 22, 2009

Is it time for the city to fold on the "Heritage Building"?

Summer's almost here, and that means it must be time for Portland taxpayers to get soaked some more on the infamous "Heritage Building" deal over on MLK. This one has been a financial bomb since forever -- long before we first blogged about it in October 2005. Here's what we reported then:

[L]ast week [the Portland Development Commission] announced that they had closed on the sale of the bombed-out "Heritage Building" on NE Martin Luther King Jr. Boulevard to a group of developers for, literally, one dollar. This is property that the PDC paid $400,000 for in 1999 -- now gone for a buck. That and $2.4 million in low-interest loans is supposed to get the new owners cracking, finally, on turning the property into something useful, after years and years and years of talking about it.

Back in 2001 (when the property was still being called the Weimer Building), the story was that the PDC was going to sell the building to a developer for around $500,000.... "But just like everything else, I guess those crazy dreams just kinda came and went."

The [PDC] made a $2.45 million sweetheart loan to the developers to whom it was handing the place. There was a senior construction loan with Albina Bank, too.

Well, the project's a flop, and now both loans are in default. They're rearranging the deck chairs with a new senior lender this week at the PDC. If the new private loan doesn't get finalized pretty soon, a foreclosure sale is scheduled for less than a month from now.

Last year, the talk was that Bank of the West was going to take over the Albina loan, but apparently that never happened. Instead, the developer reportedly went bankrupt. And now there's talk of the PDC taking over the Albina loan -- essentially, paying off the first mortgage -- to try to salvage the $2.45 million that it has into the deal as lender on a second mortgage. The latest from the O includes this:

The [PDC] will consider buying a private bank loan to avoid a second foreclosure on a key redevelopment project....

The development company, the Heritage Building LLC, finished the work in September 2007. Since then, the company has defaulted once on the loan with Albina Community Bank, and the company filed Chapter 11 bankruptcy last year. The building remains just 56 percent leased, according to the PDC.

Commission officials, worried about another default, say they want to take over the Albina Community Bank loan to get the rest of the building leased and "protect its own investment in the property in the event of another loan default," according to a staff report....

[Eric] Wentland [manager of the developer] said his company has restructured and re-emerged from Chapter 11. He said he has letters of intent from more tenants.

But he said neither his company nor the tenants can afford to pay to finish out the space.

No word on how much is still outstanding on the loan, or how much the PDC is planning to pay to buy that paper. Last year the balance on the Albina loan was in the neighborhood of $2 million.

Let's see: We taxpayers paid $400,000 for the building, and shelled out another $2.4 million more in loans for construction. That's $2.8 million of tax dollars (and maybe more that the media hasn't reported) poured into a building that isn't happening, and probably never was going to happen. So now the call is to pungle up another $2 million so that the developer can string the PDC out even further?

And then what? More "loans" to finish the building so that additional tenants might actually be arm-twisted into moving in? How many hundreds of thousands -- or even millions -- are the additional improvements going to cost?

Maybe it would be better to let the bank take the thing over. If the building's worth more than the balance on the Albina loan (say, more than $2 million), the taxpayers will at least get something back on the $2.8 million they have sunk into this turkey. That might be as good as can be expected.

After an entire decade of struggling with this property, the PDC and its developer pals haven't been able to get anything going with it. Only a fool would think that somehow things are going to improve, especially in this economy. Dropping another dime of public money on this project -- much less more millions -- would seem like a highly questionable move.

Comments (17)

They cannot admit failure, so they will continue to shovel money to the developers until the project is finished. Then the idiot planners and PDC will declare the project a success and move on to the next wast of money.

PDC so far really hasn't been too wise on where they throw their development money since it could;ve been better used.

It probably would've been a better project out in Lents since its closer to the freeway and cheaper housing and land is cheaper out there.

However, PDC (like City Council) has this myopia about downtown and innercity areas like MLK. If you drive up MLK they have a ton of retail space that's going to things like one-man pizza joints. Not exactly AAA tenants for that type of space and yet they are building more. It just got to the point where all the developers wanted MLK land 'cause they could get cheap development dollars from PDC. So we get expensive land and overbuilt areas where they have to dive bomb the rents or take any credit risk as a tenant.

Just to clarify one point you made - if the bank does in fact have the senior loan and they take back the building through foreclosure, it won't matter what they are able to eventually sell it for, the PDC gets nothing. Any excess cash after the foreclosure will go to Albina. The foreclosure wipes out all liens junior to the foreclosing lender.

That is probably why the PDC is considering buying Albina's loan - to preserve their initial investment, which is junior to Albina. That said, this looks to me like a classic example of "throwing good money after bad."

I re-read the story and, if it makes a diff, the reason for the foreclosure is that the guy doesn't have enough income to cover the mortgage on the property. However, he is making the mortgage payments and has personally guaranteed the loan according to the story.

The PDC project at the corner of Fremont and MLK isn't doing any better. I don't believe it's ever had an upstairs tenant. Though Belly seems to be doing better than the restaurant that was there before.

Vanport Square is a very nice project, but only half leased I believe.

Now, there are two more very large projects going in, and if I know the PDC and Portland planning orthodoxy, then these buildings were required to put a bunch of retail space on the ground floor, to sit empty for the rest of time.

You know, empty storefronts are part of the blight that the PDC is supposedly fighting. Instead they spend tens of millions to create more of it.

Do the math. The costs to the taxpayers (PDC) for this building is over $5,000,000 with additional tenant improvements by PDC to get it leased/sold. The 15,000 sq. ft. of building is costing over $350 per sq/ft. Not a good deal for the Portland taxpayers.

Plus, in foreclosure it won't even sell for one-half of the $5 Million.

It sure would be great if the PDC performed performance audits. Maybe the City Auditor should step in.

"Just to clarify one point you made - if the bank does in fact have the senior loan and they take back the building through foreclosure, it won't matter what they are able to eventually sell it for, the PDC gets nothing. Any excess cash after the foreclosure will go to Albina. The foreclosure wipes out all liens junior to the foreclosing lender."

That's not right. Yes, PDC's junior lien would be wiped out by a sale, but any auction proceeds left over after the expenses of the auction and payment of Albina's first position would be applied to PDC's second position...

86.765 Disposition of proceeds of sale. The trustee shall apply the proceeds of the trustee’s sale as follows:

(1) To the expenses of the sale, including the compensation of the trustee, and a reasonable charge by the attorney.

(2) To the obligation secured by the trust deed.

(3) To all persons having recorded liens subsequent to the interest of the trustee in the trust deed as their interests may appear in the order of their priority.

(4) The surplus, if any, to the grantor of the trust deed or to the successor in interest of the grantor entitled to such surplus.

...and in the unlikely event that there's surplus after paying off the PDC's second position, then the excess would be applied to other junior liens. Then, if there's still money left, it would go to the grantor.

Sorry - I made the assumption nobody would buy it at auction and it would revert back to the bank. You are correct that if someone steps up to buy it at auction, the proceeds would be distributed as you described. That said, it is highly unlikely that someone would do this for a price greater than what the banks min bid will be. Too much risk.